The Cash-secured PutWrite Strategy and Performance of Related Benchmark Indexes

Abstract

The put-write strategy of selling cash-secured S&P 500 Index put options has the potential to appeal to investors who wish to add income and attempt to boost risk-adjusted returns, in return for risking under-performance during bull markets. An investor who engages in a cash-secured (or collateralized) put sale strategy sells (or “writes”) a put option contract and at the same time deposits the full cash amount necessary for a possible purchase of underlying shares in his brokerage account. The first major benchmark index for the cash-secured put strategy is the CBOE S&P 500 PutWrite Index (PUT), which was introduced in 2007 and has daily historical data back to June 30, 1986. This article analyzes the performance and volatility of the CBOE S&P 500 PutWrite Index. Over the period studied, the PUT Index outperformed the S&P 500 Index with significantly lower volatility. A key factor in the superior performance of the PUT Index was the fact that the S&P 500 options were richly priced—the implied volatility for the S&P 500 options usually was higher than the subsequent realized volatility of the S&P 500 Index.